The "Truth" About Zambia's Debt

 Zambian social media platforms, especially WhatsApp groups, were very active yesterday sharing and discussing the publication of the World Bank's latest International Debt Statistics Handbook. I've lost count of the number of friends on WhatsApp who sent me the hyperlink to the download page of the book. Ordinarily,  the publication of the Debt Statistics Handbook goes without notice in much of the world and especially in Zambia. So why all this interest this time around?

Well, in the last couple of weeks, "Zambia and its debt" has been a topical issue with prominent coverage in the Financial Times and Bloomberg among other international outlets. The latest round of interest comes on the heels of an official request from the Zambian government for a payment holiday on upcoming debt service obligations. So this week's publication of the World Bank's International Debt Statistics Handbook (hereafter IDSH) fell into this milieu of strong emotions around Zambia and its debt. 

So why all the fuss? Well, all the commentary on WhatsApp, Twitter and Facebook on the the IDSH zeroed in one single statistic reported at the top of page 150: Zambia's external debt at the end of 2019 was $27 billion dollars! This is certainly a huge number and would suggest that the country's external debt was almost equal to the size of the country's GDP. And for many of yesterday's commentators, this number was evidence that the Zambian government was understating the true nature of its external debt. For example, Finance Minister Bwalya Ng'andu recently told parliament that external public debt was $11.97 billion dollars, a number that is about $15 billion lower than the World Bank's number.   

So what is going on here? The confusion stems from the conflation of Total External Public Debt with Total External Debt. The two aren't the same thing even though they seem like they are. 

Total External Public Debt (the first one) refers to all foreign denominated debts that are owed by the Zambian government. This includes external debt directly owed by the government and debt guaranteed by the government but contracted by government or quasi-government entities. For example, Total External Public Debt would include the (in)famous Eurobonds and/or any guarantees issued by the government in favour of, for example, the Zambia Electricity Supply Corporation (ZESCO).   

Total External Debt, on the other hand, is the sum total of all the external debt owed by entities domiciled in Zambia. This includes debt owed by the Zambian government (as defined above) and that is owed by Zambia's private sector. Total External Debt would include external debt owed by the government plus external debt owed to foreign creditors by, for example, the privately-run mining industry. 

By definition, and given the above, Total External Public Debt can never exceed Total External Debt. The two can be equal which would imply that all external debt is government debt. In practice, Total External Public Debt tends to be lower than Total External Debt primarily because the private sector also borrows from foreign creditors.  

So what does all this mean for the publication of the IDSH and the commentary that followed? Well, the first thing is that the World Bank and the Zambian government are saying the same thing. The fourth line item on page 150 of the IDSH says that Total External Public Debt at the end of 2019 was $11.1 billion [1]. Minister Ng'andu told Parliament on 25th September 2020 that "[total] external public debt stock increased to US$11.97 billion as at end-June 2020 from US$11.48 billion at the close of 2019...". As one can see, these numbers are pretty much around the same ballpark. 

The June 2020 number, as reported by the Minister, is slightly greater than the 2019 numbers (from the government itself and the World Bank) because of the likely accrual of additional external public debt in the first 6 months of 2020. The 2019 numbers by the World Bank and from the government are slightly different from each other because of likely accounting/reconciliation issues. Interestingly, government's number for end 2019 is greater by about $300million. This might be the result of one public guarantee or the other that was not captured by World Bank statisticians. 

So in many ways the World Bank's IDSH is telling us nothing new beyond what the government has already told us regarding the country's external public debt. 

As to whether the $11 billion number (from both the World Bank and the government) is to be believed is a different question altogether. I have good reason to believe that the "true" external public debt is around this figure. Margaret Mwanakatwe, Ng'andu's immediate predecessor at Finance, instituted a debt reconciliation drive about two years ago and committed the Ministry of Finance to issuing quarterly debt briefings (although the frequency of the briefings has reduced lately). This was in response to heavy domestic and foreign criticism that the Zambian government did not know the true extent of its debt obligations. It appears the Ministry of Finance has gotten on top of this issue and, for example, recent IMF statements on the country are no longer broaching the subject of debt reconciliation as they did a couple of years ago. Economist Trevor Simumba, however, believes the true extent of external public debt might be higher owing to the opacity around debt contraction from China. He might very well be right. 

Before concluding, I want to briefly talk about one aspect that struck me from the IDSH that few talked about yesterday and that I had been unaware of. According to page 150 of the IDSH, Zambia's private sector owes a whopping $14.7 billion to foreign creditors! In other words, private multinational corporations, private companies and private individuals all domiciled in Zambia collectively owe about 54% of Zambia's Total External Debt (recall the definition of this from above). This implies that Zambia's private sector is just as indebted to foreign creditors as the Zambian government is. In actual fact, the private sector owes much more. 

As a country, we have not debated and thought about private sector debt as much as we should. It's worth engaging with this issue because, for one thing, economic crises can result from the unsustainable buildup of external debt by the private sector (see the Asian Financial Crisis) just as much as they can from unsustainable buildup of public debt. Second, pressure on the domestic currency (the Kwacha) can also arise from the demand for foreign currency by the private sector to meet its external debt obligations just as it can from demand by the government. So in a nutshell, any talks about devising a strategy for Zambia's external debt should include discussions about external debt held by the private sector. 

Notes   

[1] The IDSH refers to it as "Public and Publicly Guaranteed Debt"
 

   

Problems with Central Bank's take on Bill 10

Readers of this blog will recall that in July I raised concerns about a proposed amendment to the functions of the Bank of Zambia (BoZ). The proposed amendments are contained in the infamous 2019 Constitution Amendment Bill (aka Bill 10).

Specifically, Bill 10 proposes to delete clause (2) of Article 213 of the current Constitution and replace it with a new clause. Article 213 (2) of the current constitution spells out BoZ's functions as follows:

"(2) The functions of the Bank of Zambia are to— (a) issue the currency of the Republic; (b) determine monetary policy; and (c) regulate banking and financial services, banks, financial and non-banking institutions, as prescribed."

Bill 10 proposes that Article 213 (2) be replaced with:

"(2) The function of the Bank of Zambia is to formulate and implement monetary policy."

The concluding section of my July blog post read as follows:

"So it seems that the Draft Amendment Bill seeks to strip away from the Central Bank the functions of issuing currency and the regulation of the financial sector. These two functions are pretty core to what central banks do across the world. And I can't see how another entity would logically takeover these functions, particularly the one to do with issuing currency. And the Draft Amendment Bill is silent on where functions (a) and (c) will now sit.

This is a strange amendment and one hopes that Members of Parliament will probe for details and justifications once the Bill is tabled in the National Assembly."

Yesterday, BoZ issued a belated press statement seeking to explain the reasons for the proposed amendment. Below is an excerpt of the most important parts of their press statement:

"The proposed provisions relating to the Central Bank were motivated by the Bank which is of the view that the Constitution should only contain broad constitutional principles which are operationalised through detailed legislation passed by Parliament. In this regard, the Bank submitted proposals for amendment of the Constitution regarding the Central Bank's functions to be restricted to the primary function, while additional functions, objectives and powers will continue to be subject of an Act of Parliament as envisaged under Article 215 of the Constitution of Zambia, Act No. 2 of 2016. 

The Bank has thus submitted to the Government that the primary function of the Bank should be to formulate and implement Monetary Policy. This submission is consistent with best practice on central banking and also complies with the SADC Model Law for Central Banks which stipulates that all Central Banks in the region should move towards adopting a single primary objective."

BoZ's press statement revealed that they are the originators of the proposed amendment. Further, the proposed amendment, according to BoZ, has two objectives: 1. Maintain broad principles in the Constitution but have specifics spelled out in subsidiary legislation and 2. Bring the Bank's "primary function" in line with "best practice" and in line with SADC Model Law for Central Banks. 

I find the Central Bank's motivations to be highly problematic and also confusing. First, the issuance of currency is no ordinary function such that its specifics can be left out of the Constitution. Relegating specifics about currency issuance to subsidiary legislation leaves them wide open to manipulation. The requirements to amend subsidiary legislation are much less demanding than those required to alter sections of the Constitution. Suppose the specifics about currency issuance were only spelled out in subsidiary legislation such as the BoZ Act, nothing would stop a government with sinister aspirations from proposing an easily achievable amendment to remove this function from BoZ and give it to some other less competent entity. And these kind of things are very much possible given the current political context in the country.

Second, BoZ argues in their press statement that they are proposing the amendments to meet "best practice" and SADC objectives. This is the bit that is confusing. The Constitution is a document meant for the people of Zambia and should only contain the aspirations of the people of Zambia and no one else. Any "best practice" or regional norms should be reflected in our Constitution to the extent that they are in line with our aspirations and our own unique set of circumstances. The latter point is important because the current political climate teaches us every day that we need to make our Constitution ever more specific in its contents rather than make it vague with dilutions. This may not be the case with other countries in SADC who might have better political contexts where such vagueness may not pose existential threats. In any case, the same objective of satisfying "best practice" and SADC norms can still be met by spelling those out in subsidiary legislation and leaving the current Constitutional provisions intact.

In a nutshell, I don't find BoZ's justifications convincing and I am still of the opinion that this proposed amendment should be withdrawn and Article 213(2) should remain as is. Many countries have come asunder due to the careless handling of the printing press.

  

Electricity tariff hikes will harm the poor

Zambia is once again experiencing crippling power outages with load-shedding of at least 6 hours a day in many parts of the country. The last time load-shedding was this heavy and this widespread was 2015. ZESCO, the electricity utility, says this year's load-shedding, just as the one in 2015, is due to low water levels at the country's main hydro power plants. Zambia generates most of its electricity from hydro sources.

The Zambian government is considering importing up to 300MW of emergency power from South Africa as a coping mechanism. Given the strained state of the country's finances, the Minister of Energy has suggested that electricity tariffs could be increased by as much as 75% to pay for the imports.

Research that my colleagues and I have conducted suggests that such a tariff increase would have grave consequences for the poor.

In 2017, ZESCO was allowed to implement a tariff hike of 75%. The motivation was that local tariffs were not cost reflective and needed to be adjusted upwards. Such an upward adjustment would make investments in electricity generation attractive for private sector players (the jury's still out on whether this has actually happened).

In a research paper that Mashekwa Maboshe, Akabondo Kabechani and I published this year in the journal Energy Policy, we simulated the likely impact of the 2017 tariff hike on different income groups in Zambia (published version here; ungated version here).

We found that the poorest 10% of Zambian households (the poorest decile) were likely to experience a 9.4% reduction in real household expenditure as a result of the tariff hike. In comparison, the real household expenditure decline for the richest 10% (richest decile), was only going to be 3.2%. In other words, the poorest 10% were going to see their real household expenditure decline at 3 times the rate that it would decline for the richest 10%.

An increase in electricity tariffs has the same impact on our incomes as inflation. Inflation, which is the general increase in prices, reduces the number of goods we can really (or actually) buy with our incomes. In other words, inflation reduces our real incomes or real expenditures. Electricity tariff increases have the same effect. Firstly, the tariff increase immediately affects the price of electricity (the direct effect). Second, because electricity is a vital input into the production of other goods, the prices of other goods also increase (the indirect effect). The poor are hardest hit because electricity and goods produced with electricity occupy bigger shares of their household budgets than the well-off. 

Lastly, our simulations showed that an additional 100,000 people would become poor as a result of the tariff increase. This is because their real expenditures would fall below the poverty line as soon as electricity prices went up.

Our work shows that the burden of increased electricity tariffs in Zambia falls overwhelmingly on the poor. One hopes that Cabinet and the public will take this into consideration as they debate the next round of tariff increases. 

(This piece has benefited from discussions with my coauthor Mashekwa Maboshe)

Yes, debt payments are high and rising

This past Friday president Lungu delivered his annual address to the National Assembly. The address is meant to provide policy guidance for the year ahead as well as signalling the start of a new session of parliament. One of the most striking paragraphs from the president's address to the House was this one:

Our non-discretionary expenditure, which comprises personnel emoluments and debt stands at 50.1% and 40% respectively, giving a total of 90.1% of our annual budget. This leaves the discretionary expenditure amount to stand at 9.9% of our annual budget. This Mr. Speaker is an alarming ratio.

I initially thought that the president's speech writers had gotten their facts wrong around debt expenditure  -- surely our debt service payments weren't as high as the president was making them out to be?

I was compelled to factcheck this statement all the while hoping against hope that the president, or his speechwriters, were wrong.

The most sensible way of fact checking this is to compare the president's statement with the official position on debt expenditure as contained in the 2019 Budget Address. According to the budget, the total amount of money set aside for debt service payments for 2019 was K24billion (K9billion for domestic debt and K15billion for external debt). Total expenditure for the budget as a whole was K87billion. This gives a debt expenditure share of 28%.

So did the president exaggerate the budget's debt share by a whole 12 percentage points? Not exactly.

Recall that in August of this year, the new Minister of Finance Dr. Bwalya Ng'andu asked parliament to approve a supplementary budget of K9.8billion. Dr. Ng'andu wanted the extra money to mostly pay for unexpected increases in debt service payments as a result of a weaker Kwacha among other reasons. Adding the amount that Dr. Bwalya asked for brings the total debt expenditure for 2019 to K34billion, representing a budget share of 35%. A number that's very close to what the president said in the National Assembly. (I invite better informed readers to figure out what might account for the 5 percentage points difference between what the president said and what I have estimated here).

Have we always spent this much of our budget on servicing debt? Figure 1 below shows that debt service payments were only 9% of the budget in 2009 and began to grow at alarming rates starting about 2015. By 2019, the debt service share in the budget was 28% (35% if you add the supplementary expenditure). So the share of the national budget dedicated to debt has grown by over 200% from 2009 to 2019 and is now at least a third of the budget if not more!

Figure 1: Total Debt Service Share in the National Budget
Source: Various National Budgets

It's also interesting to figure out what the structure of debt payments has looked like over this period. In other words, what has been the share due to domestic debt payments versus external debt payments?

Figure 2 provides this split. From 2009, the external debt expenditure share in the budget was very small (at 2.4%) and less than the domestic share (at 6.4%). However, beginning in about 2013, the external debt share began to increase rapidly so that by 2019, the budget was spending 17% on servicing external debt and spending 10% on domestic debt service. And servicing external debt is a Herculean effort because you need to use precious, and hard to earn, foreign currency to do it.

Figure 2: Total, Domestic and External Debt Shares in National Budget
Source: Various National Budgets

Finally, it's worth comparing the budget's expenditure on debt payments versus expenditure on what most citizens would deem as desirable expenditures over this period.

Figure 3 provides this information. In 2009, the shares of the budget dedicated to education (17%) and health (12%) were both greater than the share allocated to total debt service (9%). Today, the opposite is true -- the total debt share in the budget far exceeds the shares allocated to education and health combined!

Figure 3: Total Debt Share, Education Share and Health Share in National Budget
Source: Various National Budgets

A closer inspection of Figure 3 suggests that the health share, for example, begins to decline around about the time that the total debt share begins to explode (the response in the education share is a little bit delayed). Any student of social sciences, however, knows that correlation is never proof of causation -- in other words, the declines in the health and education shares may have nothing to do with the increase in the total debt share even though they both happen at the same time.

We do, however, have some very good scholarly evidence that the relationship depicted in Figure 3 is likely to be causal especially in sub-Saharan Africa. In other words, the declines in the health and education shares in Figure 3 are very likely caused by increases in debt service payments. And this is likely to get worse as debt service payments continue to occupy ever bigger chunks of the national budget going forward.

A curtailment of the Central Bank's powers?

Like everyone else, I have been reading through the draft of Zambia's 2019 Constitution Amendment Bill.  The Bill, which is yet to be tabled in the National Assembly, proposes a host of amendments to the current constitution. Many of the proposed amendments have been condemned by different sections of Zambian society including, and surprisingly so, the ruling Patriotic Front. One of the things that's caught my attention in the Bill, and that hasn't been touched on yet, is what appears to be a curtailment of the Bank of Zambia's powers.

The memorandum that accompanies the Draft Amendment Bill from the Attorney General lists a series of objectives of the Bill. Objective (n) reads: "...to revise the functions of the Bank of Zambia". Article 71 of the Bill spells out the exact revision that is sought as follows:

71. Article 213 of the Constitution is amended by the deletion of clause (2) and the substitution therefor [sic] of the following: (2) The function of the Bank of Zambia is to formulate and implement monetary policy. 

However, clause (2) of Article 213 in the current Constitution (the clause to be replaced) reads [for completeness I am also reproducing clause (1)]:

213. (1) There is established the Bank of Zambia which shall be the central bank of the Republic. (2) The functions of the Bank of Zambia are to— (a) issue the currency of the Republic; (b) determine monetary policy; and (c) regulate banking and financial services, banks, financial and non-banking institutions, as prescribed.

So it seems that the Draft Amendment Bill seeks to strip away from the Central Bank the functions of issuing currency and the regulation of the financial sector. These two functions are pretty core to what central banks do across the world. And I can't see how another entity would logically takeover these functions, particularly the one to do with issuing currency. And the Draft Amendment Bill is silent on where functions (a) and (c) will now sit.

This is a strange amendment and one hopes that Members of Parliament will probe for details and justifications once the Bill is tabled in the National Assembly.

Audio: Panel on the AfCFTA at the Norwegian Council for Africa

Last week Wednesday, I was part of a panel discussion in Oslo organized by the Norwegian Council for Africa on the prospects of the African Continental Free Trade Area (AfCFTA). The AfCFTA came into force last Friday and is being billed as the biggest Free Trade Area in the history of the world. The overarching objective of the AfCFTA is to increase the level of intra-African trade which has been estimated to not be more than 20% of all Africa's trade. The United Nations Economic Commission for Africa reckons the AfCFTA could increase this number by 50%! Our panel engaged with various aspects of AfCFTA particularly the prospects for success. You can listen to the audio of the panel discussion below. My co-panelists were Andreas Moxness, professor of economics at the University of Oslo and Cathrine Jahnsen of the Norwegian-African Business Association. The moderator was Celina Bright-Taylor of the Norwegian Council for Africa. 

Audio: Sishuwa Sishuwa at the University of Cape Town

This past Wednesday, Dr. Sishuwa Sishuwa of the University of Zambia gave a lecture at the University of Cape Town's Graduate School of Business under our Distinguished Speakers Series. The title of his lecture was "Africa Day in the Age of Xenophobia: Another Perspective". The lecture was given in honour of Africa Freedom Day (Africa Day) which falls on 25th May. I moderated his talk and recorded it for posterity. You can listen to the recording below.

Audio: Goodwell Mateyo at the University of Cape Town

This past Tuesday, the Graduate School of Business at the University of Cape Town hosted Goodwell Mateyo as part of our Distinguished Speakers Series. Mr. Mateyo is currently president of the Zambia Chamber of Mines and General Counsel of Mopani Copper Mines in Zambia. The title of Mr. Mateyo's talk was "Challenges and Opportunities of Mining in Africa: The Case of Zambia". Mr. Mateyo spoke for about 25minutes and thereafter I engaged him in a conversation. This was followed up with a Q&A session with the audience. 

We were delighted to have in attendance Dr. Situmbeko Musokotwane and Mr. Bradford Machila, former cabinet ministers in the Zambian government. Dr. Musokotwane, who was a Minister of Finance, also made some remarks in the Q&A session. 

The audio recording of the event is below (unfortunately the recording started about 10mins into Mr. Mateyo's talk). 

Is the re-introduction of a sales tax a good idea?

[This post has greatly benefitted from conversations with Mwansa Mushinge on the practical aspects of the VAT]


This past Friday, the Minister of Finance, Margaret Mwanakatwe, presented her maiden budget address to the National Assembly of Zambia. One of the biggest announcements of her address was the proposed re-introduction of the Sales Tax to replace the Value Added Tax (VAT). The VAT was introduced in 1994 to replace the then Sales Tax (so we are about to go full circle). Given that the VAT finances about 17% of the national budget, it is important to think through the implications, if at all any, of what appears to be a fundamental shift in tax policy.

A VAT and a sales tax are all consumption taxes and are paid by the final consumer of goods. In theory, it doesn't matter whether a country levies a VAT or a sales tax because they raise equivalent amounts of revenue if levied at the same rate. Their only theoretical difference has to do with the way they are collected.

With a sales tax, the tax is only collected at the final stage of the production process (at the retail stage). The VAT, on the other hand, is collected at every stage of the production process but is only paid by the final consumer of the good.

An example to illustrate: suppose Zambia levies a sales tax of 10% on bread. And suppose, for the sake of argument, that the final retailer of bread wants a sales revenue of K20 from every loaf of bread. Given a sales tax of 10%, a loaf of bread will retail for K22 (K20 + 10% of K20). The retailer will keep their K20 and remit the K2 sales tax to the Zambia Revenue Authority (ZRA).

Given that the sales tax is only supposed to be paid by the final consumer, businesses that buy goods that are inputs into their production processes need to obtain exemption certificates that exempt them from paying the tax. So in our bread example, the bakery where the bread is baked and the retail shop where the bread is finally sold will need to obtain such exemption certificates.

Now suppose that the country does away with the sales tax and introduces a VAT of 10% on bread. To see how the VAT is collected, we will have to break up the production of bread into different stages.

At each stage, "value is added" and the VAT is then levied on the value added. Suppose at the first stage, the baker buys flour from a miller for K5.50. The miller returns K5 as sales revenue and remits K0.50 (10% of K5) to ZRA as VAT. The baker uses the flour to bake bread which he/she sells to the retailer for a VAT inclusive price of K11 (K10 sales revenue and K1 VAT). The baker, however, doesn't remit the full K1 to ZRA but nets-off (recovers) the K0.50 that he/she paid as VAT to the miller. So the baker ends up remitting K0.50 to ZRA as VAT. The baker is allowed to net-off precisely because the VAT, being a consumption tax, should only be paid by a final consumer. The retailer then retails the bread for K22 (K20 sales revenue and K2 VAT). The retailer, given that he/she is also not the final consumer, does not remit the full K2 but nets-off (recovers) the K1 that he/she paid to the baker as VAT. So the retailer remits K1 to ZRA.

In this VAT example, the total money paid to ZRA is K0.50 from the miller + K0.50 from the baker + K1 from the retailer = K2. So the same amount of money is raised with the VAT as with the sales tax! Notice, however, that the only person who doesn't net-off is the final consumer. Therefore, just like in the sales tax scenario, the final consumer is the only one who pays the tax [1].

So if the VAT and the sales tax raise the same revenue why do so many countries prefer a VAT over a sales tax? For example, the Organisation for Economic Co-operation and Development (OECD) counted about 165 countries as operating a VAT in 2016.

The reason for the popularity of the VAT over the sales tax has mainly got to do with the fact that tax payers are more likely to comply with a VAT than with a sales tax. Tax compliance rates with a VAT tend to be higher than those with a sales tax precisely because of the netting-off process described above. For example, in netting-off K0.50 from the K1, the baker is saying to ZRA that they paid K0.50 to the miller as VAT which they are claiming back. Knowing that the baker will likely claim from ZRA forces the miller to remit the K0.50 to ZRA instead of holding on to it. Similarly, the retailer has an incentive to claim the K1 that was paid to the baker as VAT. Knowing that the retailer will likely claim forces the baker to comply by correctly remitting their portion to ZRA. With a VAT, ZRA can easily uncover tax evaders because the system self-enforces. A netting-off not backed by an earlier remitting of funds sets off red flags.

This is not entirely the case with a sales tax. The only time taxes are collected with a sales tax is at the final stage with the consumer. And the consumer, being the last person in the chain, cannot net-off from someone else. Therefore, the retailer faces a huge incentive to not remit the sales tax collected from the final consumer. The retailer also faces an incentive to not charge the final consumer a sales tax because doing so makes his/her products cheaper.

So if compliance rates are higher with a VAT than a sales tax, why is the Zambian government re-introducing a sales tax? The Minister of Finance in her address did not give the reasons for the re-introduction of the sales tax. However, in reading between the lines, it appears that the system of "VAT refunds" has not only been a headache for ZRA to administer but has also added unpredictability to the country's revenues.

The question is how do VAT refunds arise in the first place? In the scenario presented above, refunds do not arise because every producer nets-off what they pay along the value chain. However, instances do arise where what a producer pays in VAT is greater than what they collect in VAT when their product is sold to the next person in the chain. In such a scenario, netting-off will not be sufficient to fully recover what was paid in VAT.

The mines particularly suffer from this. Often the mines might buy lots of expensive capital equipment on which they pay VAT but for one reason or the other the copper exported may not result in VAT to the same extent. In this case, the difference will have to be refunded from ZRA. The same is also true for entities that sell products that are zero-rated or exempted from VAT. These entities might buy inputs that attract VAT but their products are not allowed to attract VAT. So netting-off will not lead to a full recovery hence the need for refunds from ZRA.

In theory, processing refunds shouldn't be a headache -- the mines paid VAT on some equipment. This VAT was remitted to ZRA by the mines' equipment supplier. All the mines are asking for is for this VAT, which they paid, be refunded. In practise it tends to be a headache. Audits have to be performed to track whether VAT was actually paid or not. Second, this situation creates instabilities in the country's tax revenues. ZRA receives VAT from equipment purchased by the mines hoping that the mines will recover this money on their own in the value-chain. ZRA then sends this money to Central Government and Central Government spends it. The mines later come back asking for this money given that they are unable to recover it in the value chain. Government is now out-of-pocket and has to find this money somehow.

The Zambia Chamber of Mines estimates that the mining industry is owed some US$300mn in VAT refunds. And it is possible that the country has already spent this money!     

So the need to do away with refunds seems to be what has motivated the Minister's proposal to re-introduce the sales tax. But one hopes that the Minister and her team have properly weighed the headaches involved with the VAT refunds against the real risk that tax compliance will be lower with a sales tax, possibly resulting in lower tax revenue.



Notes

[1] As a technical point, note that that at each stage, the VAT is levied on the value-added, hence the term "Value Added Tax". The miller added K5 of value to wheat to make flour. Therefore the VAT at this stage is 10% of the value-added = K0.50. The baker obtains a sales revenue of K10 from the bread implying he/she added value of K5 -- this once again attracts a VAT of K0.50. The retailer then obtains a sales revenue of K20 implying a value addition of K10 and consequently a Value-Added Tax of K1 (10% of K10). So the total value-added in the production chain is K20 hence a VAT of K2.

How important is foreign "assistance" to Zambia?

Yesterday Zambians woke to the news that the United Kingdom had frozen aid funding to the country. This follows allegations of corruption amounting to some $4mn in the administration of the country's Social Cash Transfer (SCT) programme. The SCT is meant to benefit the poorest of the poor in Zambia. Other donor countries (known formally as "cooperating partners") have since followed suit. Ireland, Finland and Sweden have announced the suspension of their own aid initiatives to the country. The president has since called for a speedy inquiry and in the interim dismissed the Minister responsible for overseeing the SCT. 

The diversion of money meant for the poor is definitely something to be upset about. And I, like many other Zambians, are angry that something like this happened. My intention, however, with this post is not to defend the despicable acts of those who were involved in the spiriting away of SCT money. Rather, my intention is to take the opportunity presented by this week's happenings, as ghastly and as indefensible as they are, to engage a long-running narrative on the importance of foreign assistance to Zambia.

Discussions about "cooperating partners" in Zambia often take place under the presumption that foreign aid is gravely important in funding our day-to-day operations as a country. For example, the huge sense of public panic seen this week following withdrawals and threatened withdrawals of donor funding betrays a presumption of such importance. Some are arguing that the president's uncharacteristically swift reaction to the SCT scandal is itself illustrative of the degree of the financial importance of our cooperating partners.

But how important are donor funds for our finances? To get a sense of the orders of magnitude, I have looked at each and every budget address since 2007 (2007 being the earliest date for when budget addresses are available on the National Assembly's Website).

In presenting the national budget to parliament, the Minister of Finance, among other things, presents estimates of expenditure for the year ahead in addition to estimates of revenue that will support such expenditures. Revenue sources are split into two major parts: (1) Total Domestic Revenues and Domestic Financing and (2) Total Foreign Grants and Financing. It's the latter segment that is of importance to this post.

Below I construct several series showing percentage shares of different segments of donor assistance in the total budget. [Ideally I should construct these series using realized quantities as opposed to forward looking estimates (2018 appears in the below series because it's an estimate made in 2017). Sadly, the budget speech rarely contains information detailing expenditures and revenues for the previous year. Information on realized quantities is supposed to be contained in the Annual Financial Reports prepared by the Ministry of Finance. Sadly only 4 of these are available on the Ministry's website. In any case, looking at the 4 available financial reports, one gets the sense that any differences between estimates and realized quantities are small].

Figure 1 below shows the percentage of the total national budget that is due to the donors. The figure shows that in total, donors supported about 30% of the budget in 2007 and this has come down somewhat to settle at around 20% -- which is the average over the 11 year period. Stated differently, the information in Figure 1 shows that the people of Zambia, on average, funded 80% of their country's operations over the period 2007 to 2018.

Figure 1: Total Foreign Assistance as a percentage of the total budget
Source: National Budget Speeches, 2007 to 2018

The information in Figure 1 is a little misleading. Total foreign assistance is made up of two parts -- a part that is given as a grant to government (given "free of charge") and another part that involves loans that are to be paid back. So we shouldn't really think of the loans as "assistance" because we are borrowing that money ourselves and are going to pay it back in the future -- and it's presumably a win-win because the donors stand to earn a return on the transaction. (You wouldn't say your bank was "assisting" you in granting you a mortgage to buy a house).

Figure 2 disaggregates total assistance into a grant component and a loan component. As before, the blue line is total assistance. The orange line shows the pure grant component (given "free of charge") that one can think of as pure assistance. The gray line shows the loan component that I argue is quid pro quo and is not to be thought of in the same way as one would think of a grant.

Figure 2: Different components of total assistance as a % of the total budget
Source: National Budget Speeches, 2007 to 2018

Figure 2 shows that the grant component of aid in the total budget has declined from about 20% in 2007 to 3% in 2018. Subsequently, the component due to donors loaning us money that we will eventually pay back has increased from about 10% in 2007 to somewhere between 15% and 20% in 2017/18. Figure 2 shows that increasingly we are largely effectively self-financing our budget  -- the grant component in the national budget has come down to very low single digits. And it's also quite likely that we could do away with the entire grant component if we set our spending priorities right as a country.

Figure 3 below is a different representation of the information in Figure 2. It shows the percentage split between grants and loans in the total donor "portfolio". Figure 3 shows that the loan component has become increasingly important for donors in their dealings with the country. They've reduced the share of grants in their "assistance" programmes and ramped-up the loan component -- a component that we as a country will eventually pay back. This can hardly be thought of as assistance or aid in the everyday usage of these terms. 

Figure 3: Components of the portfolio of donor "assistance"
Source: National Budget Speeches, 2007 to 2018

To conclude, donor assistance, in as far as funding our national budget is concerned, is not as significant as implied by every day conversations around this topic. The part of such assistance that can be thought of in purely altruistic terms (the grant component) has declined from a double digit budget share in 2007 to a very low single digit share in 2018. It's very likely that we can do away with this component if we got our spending priorities right as a country. 

I also acknowledge that donor assistance, in as much as it may not be important for the overall budget, is important for certain sectors. Anecdotal evidence suggests that a non-trivial portion of public expenditure on education and health is funded by the donors (difficult to pin down exact magnitudes given the aggregated nature in which this information is presented in the budget). Second, donors are also important in funding civil society organisations that play a vital role in safeguarding democratic tenets in the country.

In praise of Denny Kalyalya

On September 28, 2015, the Kwacha slipped 20% against the US dollar. It had started the day trading at K10 to the dollar and closed at K12. At some point during the day, some bureaux de change were quoting rates as high as K15 -- a reflection of that day's panic, confusion and speculative buying (my sister, who cares little for finance, called in the afternoon asking if dollars were a good investment). This was the biggest single day drop in 14 years.

That day's events were a culmination of the currency's very weak performance from the beginning of the year. Between January and September of 2015, the Kwacha's value had reduced by more than half against the US dollar making it the worst performing currency in the world.

Given Zambia's heavy reliance on imports, prices of goods and services began to rise at an alarming rate not long after September. After registering single-digit inflation for much of the post-HIPC era, the annual inflation rate reached 14% in October 2015 from 7% that January and by year's end it was just above 20%. The inflation rate had tripled in a single year!

As 2016 was starting, the expectation was that the Kwacha would continue its free-fall and along with it prices of goods and services would go through the roof. After all the country was in the midst of a catastrophic fiscal crisis and potentially divisive presidential elections were slated for the second of half of the year.

Unexpectedly, the Kwacha's wild gyrations of 2015 stopped in 2016. Granted, there was a slight depreciation in January with the local currency starting the year at K11 to the dollar. But by year's end the Kwacha had actually gained closing at K9.

As for inflation, it peaked at 22% in March of 2016 and thereafter began a slow and steady decline. By October the inflation rate was back to single digits, at 8%, and has been in single digits ever since.

The turnaround of 2016 was nothing short of miraculous. Had the country carried on with the pattern of inflation seen at the end of 2015, food prices would have doubled by 2018!

But calling it a miracle would render the turnaround inexplicable and that would be the furthest thing from the truth.

Even though the originator of the crisis of 2015 was far away at the Ministry of Finance, the job of putting out the fire was placed at the foot of the Central Bank. In February of 2015, president Edgar Lungu announced the appointment of Dr. Denny Kalyalya as the new governor of the Bank of Zambia. Dr. Kalyalya would be taking over from Dr. Michael Gondwe, whose short tenure at the bank had been underwhelming.

No sooner had Dr. Kalyalya settled into his new role than the bottom fell out of the Kwacha. The local currency, whose job it was for him to defend, was now the laughing stock of many across the world.

Dr. Kalyalya and his team correctly diagnosed that the proximate cause of the Kwacha's problems was a chronic shortage of US dollars on the local market stemming from "flight-to-quality" concerns. Consequently, the Central Bank engaged in one of the most audacious interventions in the foreign exchange market in Zambia. The evidence for this is in the dramatic draw-down of the country's reserves between January and December of 2016 (see the blue line in the figure below).

Reserves went from US$2.9billion in January to US$2.3billion in December -- a decline of some US$600million in a space of 12 months! Half way into the year (about July), the Kwacha somewhat stabilized (see the orange line in the figure below) and the Central Bank slowed down the rate at which reserves were being depleted.

Note: Forex Reserves (blue line) and Exchange Rate (orange line), 2016

                             Source: Bank of Zambia

What about inflation? Given Zambia's reliance on imports, inflation was always going to be tamed once stability in the foreign exchange market had been re-established, something that Kalyalya and team succeeded in doing in the latter part of 2016. But it must have occurred to the Central Bank that upward pressures on inflation were also the result of excess Kwacha liquidity in the domestic money market. That is, some upward pressure on prices was due to excess demand in the economy.

Consequently, the Central Bank in November of 2015 hiked the Bank of Zambia Policy Rate, the rate that influences access to credit in the wider economy, from 12.5% to a record high of 15.5% and kept it at that level throughout 2016. The rate hike immediately followed the emergence of double digit inflation in October of 2015.

By October of the following year, the Central Bank's interventions had borne fruit and the inflation rate slowed down to a much more respectable 8%. In February of 2017, after being comforted that inflation had been tamed, the Central Bank began a process of reversing their "tight money" policy and reduced the Policy Rate to 14% and subsequently to 12.5% in May.

In addition to the interventions outlined above, Dr. Kalyalya has successfully used "softer" measures such as holding regular and transparent press briefings to communicate the bank's future course of action  (technically known as providing "forward guidance"). This is in a bid to reduce policy uncertainty.

The interventions outlined above were certainly not without their costs. Foreign exchange reserves are not free and the hikes in the Policy Rate must have drastically affected the ability of businesses, particularly SMEs, to obtain credit. But there was a general sense of armageddon in the dark days of late 2015 and early 2016 and the heroic efforts by Dr. Kalyalya and his team brought the country back from the brink.

Knowing that the origination of the crisis was in the Ministry of Finance, Dr. Kalyalya has openly castigated government on their reckless and uncoordinated borrowing and spending policies, showing unusual independence of thought by a public servant in Zambia.

In a country where there is currently wide-scale erosion of public institutions, it is a wonderful thing to see that there are still a few good men and women who are doing the job that the people of Zambia pay them to do.

Dr Denny Kalyalya (Center) in a jovial mood after a meeting at State House

The ZRA-First Quantum Tax Story

About two weeks ago, the Zambia Revenue Authority (ZRA) announced that a preliminary assessment had uncovered tax irregularities involving a prominent copper mining company in the country. In an interview with News Diggers, ZRA communications manager Topsy Sikalinda gave the following additional information:

we [ZRA] are announcing the preliminary assessment of K76.5 billion (U$7.5 billion) issued to a prominent mining company for misclassifying consumables and spare parts at importation for the last five years. The said items were declared as mining machinery -- which attract customs duty at zero percent -- when in fact not. The applicable duty rate for the items ranges from 15 to 25 percent.

ZRA did not reveal the name of the company in question. However, an inside source from within the company itself told News Diggers that Kalumbila Mine was the company in question. Kalumbila is owned by Canadian company First Quantum Minerals Limited (FQM) -- its Canadian owners like to refer to it as Sentinel Mine.

Following ZRA's statement and news confirmation that an FQM subsidiary was at the center of a tax investigation, FQM quickly organized a conference call from Canada to give their side of story and to basically refute ZRA's assessment. In the call, FQM acknowledged receiving a letter from ZRA itemising moneys owed as follows:

                1. US$150 million as ZRA's assessed taxes due
                2. US$2.1 billion as penalties
                3. US$5.7 billion as interest on possibly the penalties and taxes due.

All this seems to be traced to some US$540 million worth of imports by Kalumbila that were declared as capital equipment or raw materials or intermediate goods instead of finished goods. According to ZRA's Schedule of Customs Taxes, capital equipment, raw materials and intermediate goods attract lower customs duties of between 0% and 15%. Finished goods attract a duty of 25%. The rationale for such tax differentials is to encourage the importation of productive goods (capital equipment, raw materials, etc...) and to disincentivize the importation of finished goods.

ZRA thinks all of the US$540 million imported by Kalumbila were, in actual fact, finished products. In other words, ZRA believes Kalumbila made false declarations. And false declarations, as per the Customs and Excise Act, attract hefty penalties.

Interestingly in their conference call, FQM acknowledges that a "high level analysis" by themselves following ZRA's letter had revealed some "incorrect assignments" of imports but such mis-assignments were minor. In other words, even they themselves acknowledge that false declarations might have been made even though they believe these to be minor (their choice of language is to refer to these as "incorrect assignments", i.e. innocent errors).

Now this is nothing but a plain-vanilla tax dispute involving a taxable entity and a tax authority. Kalumbila, even though it acknowledges some minor "errors", refutes the substantive aspects of ZRA's accusations. On the other hand, ZRA thinks Kalumbila has systematically been evading taxes by falsely declaring imports. Tax disputes of this nature are legion across the globe. But you would not get the sense that this was a run-of-the-mill tax dispute by reading international reactions to the story.

For example, frequent international tax commentator Maya Forstater of the Washington-based Center for Global Development in a guest post for a Zambian mining industry-aligned website rubbishes ZRA's claims. In the post, she relies heavily on FQM's version of events and succeeds in painting ZRA as an incompetent third world tax authority lacking in capacity to properly perform its functions. ZRA's incompetency is severally implied, for example when she says:

1. The disputed entries in question were previously signed-off by FQM and ZRA (FQM also, unsurprisingly, stress this point in their conference call)
2. ZRA irresponsibly placed the fact that FQM was being investigated in the "public domain"
3. ZRA has been receiving self-improvement help from the likes of the EU, World Bank and Norwegians.

As for point 1, yes ZRA agents might have previously signed-off the transactions but the duty (excuse the pun) is always on the taxable entity to make correct declarations. Nobody suggests incompetence on the part of the Internal Revenue Service in the US every time it's revealed that some hollywood actor has been evading taxes (see this long list of hollywood tax evaders). Also, are we ruling out FQM-induced corruption of agents in the field? 

As for point 2, ZRA in their press statement didn't mention Kalumbila or FQM by name. They merely informed the nation that some mining company (and there are many in Zambia) had been written a letter notifying them of a tax assessment. Someone within Kalumbila revealed that the letter in question had been addressed to Kalumbila. This is hardly an indictment of ZRA.

As for point 3, many of my very competent friends within ZRA will tell you about how such "capacity-building" jamborees are time wasters. My friends know what's to be done but often they find themselves entangled/constrained in their efforts by that age-old dalliance between foreign capital and the local elites who facilitate extraction. Many of those sponsoring capacity-building initiatives have ironically at one time or the other furthered the interests of foreign capital at the expense of the local population.

It's quite likely that ZRA has gotten this entire thing wrong. It's quite likely that ZRA has gotten a small portion of it wrong. But the important thing to note is that this is a standard tax dispute which the two sides will hopefully resolve amicably in due course. And the country will be the better for it because we will know and learn from the exact circumstances that led to this dispute. In other words, we will know the truth. But calling it a mafia style "tax shakedown" as some outsiders have is completely irresponsible.

Pay your heroes: Thoughts Inspired by Antonio Mwanza

Like many people, I was shocked yesterday to learn that Antonio Mwanza, the fiery spokesperson for the Forum for Democracy and Development (FDD), had defected to the ruling Patriotic Front. Mr. Mwanza has been, for the last couple years or so, the face and voice of the FDD -- issuing principled statements against the governance misdeeds of the ruling party. It is not an overstatement to say that the FDD's continued relevance owes much to Mr. Mwanza's lone efforts.

For many, especially young people, Mr. Mwanza had come to embody the manner and style of politics that many yearned for. He rarely, if ever, insulted his political opponents -- choosing instead to focus his attacks on substantive matters. Mr. Mwanza used his Facebook page for the public good often giving free advice to the youth on how to live fulfilling lives in spite of the daily challenges of being young in today's Zambia.

I first met Antonio in 2003 in the dimly lit library of the University of Zambia. It was a Friday evening and ordinarily I should have been out on the town relaxing. But Friday evening was a good time to catch up on the week's newspapers -- the General Reference section where newspapers were displayed was often empty on nights like this.

Antonio was wearing a trench coat and was stooped over The Post reading what looked like the opinion section of the newspaper. This was my first year of study and I had just been introduced to the writings of Karl Marx. Antonio, in his trench coat and pensively reading The Post, struck a resemblance to what I imagined Marx had looked like reading and writing in the British Museum.

I walked up to him and asked if I could look at the parts of the newspaper he'd already read. "Sure, Comrade", replied Antonio. Soon enough a lively discussion broke out between him and I focussed exclusively, as often happened during those days, on Fred M'membe's writings in the newspaper's opinion section. I was immediately struck by Antonio's commitment to the country and to the cause of social justice. His passion for the country and its people seemed to ooze out of every word he uttered that evening. I was therefore not surprised to subsequently see Antonio take up leadership positions in the student movement and later on in the political life of the country.

What happened yesterday is certainly a blow to the cause for democracy in Zambia. There have been very few Antonios in our country's young democracy and yesterday we lost yet another one. Mr. Mwanza claims he will be able to criticise from within the PF but this is highly unlikely. Our politics are sadly typified by toeing the party line.

Many have tried to make sense of why Mr. Mwanza would join a party whose principles seemed to be diametrically opposed to everything that he stood for. The one reason that pops up here and there is one of finances. Perhaps Mr. Mwanza had hit on hard times and the only way out was to join the ruling party?

It's not easy being in the opposition in a country where economic fortunes are highly dependent on one's alignment with the powers that be. Nason Msoni, himself a critic of government and veteran of the opposition, thinks Mr. Mwanza's defection has much to do with economics. In a widely debated and widely shared Facebook posting he had this to say:

Opposition politics entails a lot of personal sacrifices. Sometimes [opposition] leaders fail to take their children to good schools and sacrifice their little earnings to help fight for us.

Opposition leaders don't get paid whilst carrying out national duties. At the same time no employers are willing to employ an opposition leader to risk their investment or give them business.

Mr. Msoni's posting (and you should read the entirety of it alongside the comments on his wall) is heartbreaking. We expect so much from the likes of Antonio Mwanza but care so little about their personal circumstances.

In economics, a public good is a good where its provider doesn't capture the full benefits of providing the good. Clean air is an example of a public good. If I took it upon myself to provide clean air, the benefits would accrue to me but also to millions of Zambians. Some people would pay me for the clean air but others wouldn't. Because of this, I would under supply the required amount of clean air and in the extreme provide nothing.

Because of the peculiar nature of public goods, their supply has to be subsidised by the public treasury otherwise very little to nothing will be provided. (Additional examples of public goods are education, healthcare, defence and security, etc...).

What Mr. Mwanza was doing falls right within the realm of a public good. His criticisms and political commentary served to enrich our democratic dispensation from which all of us would benefit. But only a few (if at all any) of these benefits would accrue to Mr. Mwanza for as long as he continued to be in the opposition.

We need to find a way of paying for our heroes if we want them to continue fighting for us. This is why I support those parts of the Political Parities Bill that provide for the public funding of political parties (we can debate the specifics of how this is to happen in practise but we should, at the very least, agree on the principle). And by the way, this discussion should not just end at political parties but should extend to civil society organizations that are everyday involved in the very important but financially unrewarding fight of making Zambia a better place.

Otherwise we will keep losing the likes of Antonio.

Is the Lusaka-Ndola Dual Carriageway Overpriced?

On September 8th, President Edgar Lungu commissioned construction works for the new Lusaka-Ndola Dual Carriageway. The plans to increase capacity on the very busy road between Lusaka and the all-important Copperbelt Province have long been in the works and have been advocated for by many. The expectation is that the dual carriageway, once completed, will ease traffic congestion between Lusaka and Ndola with two immediate benefits: (1) Increase transport efficiency and more importantly (2) reduce the occurrence of road accidents, saving lives in the process.

What has been controversial and hotly debated since the project was commissioned are the costs of the road (see here, for example). The claim being made by many commentators is that the cost of constructing the road is many magnitudes higher than the cost in the region. There's been some allusion to the fact that South African roads, for example, cost a mere fraction of what the Lusaka-Ndola road will cost. Similar arguments have been made using examples from Namibia and Botswana.

The challenge in making comparisons about the unit costs of roads is that not any two roads are the same. Building a road between Johannesburg and Cape Town is not quite like building a road between Johannesburg and Durban and might even be vastly different from building a road between Lusaka and Ndola. Many factors drive cost differentials between what would otherwise be two identical roads. Some of the more obvious factors include geography (ruggedness of the terrain, rainfall, etc...) and proximity to markets for construction inputs (skilled labour, unskilled labour, materials, equipment, etc...). For example, a road project might be vastly advantaged by the fact that it's being built in a generally flat terrain with non-threatening rainfall. But the same project might be greatly disadvantaged by the fact that the market for important inputs is located thousands of kilometers away. A second project might face the exact opposite conditions to the first road (bad geography but close markets). A third road might have advantages in both factors (good geography, close markets). The implication of this is that comparing the costs of these three road projects would be meaningless.

What we need to do to meaningfully make comparisons is to compare like with like. That is, we need to compare mangoes with mangoes as opposed to comparing mangoes with masuku. One way of doing this is to search for two different road projects facing the EXACT same conditions (same rainfall, same terrain, same distance to markets, etc...) and make the cost comparison. But by definition, no two roads are exactly the same. This approach can be further complicated by other less obvious drivers of cost differentials like corruption or conflict.

We can get closer to a mangoes-to-mangoes type of comparison by collecting cost data on many road projects in many different countries overtime. We can then calculate summary cost statistics (average, median, mode, etc...) from the data and then use these statistics to make a statement about whether a road project under consideration is overpriced or not.

Using data from thousands of observations as opposed to only a few observations allows us to "average away" some of the idiosyncrasies associated with individual projects and this way gets us as close as we can to a mangoes-to-mangoes comparison. For example, your estimate of the average Zambian height would be closer to the truth if you obtained the average by measuring thousands of Zambians as opposed to only getting that average from only two Zambians. Your two Zambians might both be tall or both short or one short and the other tall. These idiosyncratic differences might mess up your estimate of the average. Having thousands of Zambians in your sample helps to average away these individual differences and therefore gets you closer to the true average height of the population.

To this end, the World Bank maintains a road cost database that it calls the Road Costs Knowledge System (ROCKS). ROCKS was started in 2001 with the aim of establishing an "international knowledge system of road costs -- to be used primarily in developing countries -- to establish an institutional memory, and obtain average and range unit costs based on historical data that could ultimately improve the reliability of new cost estimates and reduce the risks generated by cost overruns" (as quoted in Collier et al. 2015). To date, ROCKS has collected information on 3,222 road projects in 99 low and middle income countries (Zambia has 31 entries in the database, see Table S.1 of this paper). The extensive details about data collection and other detailed information about the database, including what constitutes road costs, can be accessed here and here.

Table S.2 below is an excerpt from Collier et al. (2015) who've analysed the data in the ROCKS database. The table shows the cost per km of constructing different types of roads (6 Lane highways, 4 Lane Highways and so on). The costs are expressed in 2000 US dollars to allow for comparison across time and across countries. The different summary measures presented are the mean (average), median (p50), standard deviation(sd), minimum (min) and maximum (max).

The table shows that the most expensive road type to construct is a New 6 Lane Expressway (it costs about US$5million per km in 2000 dollars). This is followed by a NEW 4L Expressway, followed by a NEW 4L Highway and so on.

So how does the cost of the Lusaka-Ndola Dual Carriageway fare in comparison to other similar projects across the world?

We know that the total cost of this project has been estimated at US$1.2billion (see here and here). The length of the road will be about 321 kilometers (see here). This works out to about US$3.7million per kilometer.

But before we can pass any judgement, we first have to convert the US$3.7million, which is in 2017 US dollars, into 2000 US dollars because Collier et al.'s data is expressed in 2000 dollars (this is technically known as deflating a nominal quantity into a real quantity).

After deflating, the unit cost of the Lusaka-Ndola Dual Carriageway, expressed in 2000 US dollars, is about US$2.6 million per kilometer [1]. This cost estimate is not vastly different to the estimates provided by Collier et al for a NEW 4L Highway or a NEW 4L Expressway in Table S.2. In other words, the cost for the Lusaka-Ndola Dual Carriageway is inline with costs seen elsewhere. This conclusion is arrived at by comparing the cost of the road to costs derived from a large database of similar projects maintained by the World Bank.

An important caveat, however, contained in Collier et al's analysis is that road costs in low and middle income countries (which makeup the ROCKS database) are often inflated as a result of corruption. They find that "countries with corruption levels as measured by the Worldwide Governance Indicators above the median...have about 15% higher costs"[2].

So if you think that Zambia is a generally corrupt place and if you believe Collier et al's analysis, then the road should cost about US$1.04billion instead of US$1.2billion [3].


Notes:
[1] You can easily deflate nominal US dollars to real US dollars by using this online calculator which uses Consumer Price Index data from the US Bureau of Labour Statistics.

[2] I am generally sceptical of index measures of corruption in especially so-called poor places. See my previous writing on this here.

[3] Inflating US$1.04billion by 15% takes you to US$1.2billion.

Thoughts on Felix Mutati's appointment

President Edgar Lungu has started constituting his cabinet. On Wednesday he announced Felix Mutati as the new Minister of Finance. Mr. Mutati takes over from Alexander Bwalya Chikwanda who served in the role over the last five years. Many economists agree that Mr. Chikwanda's tenure was a disaster -- we lost count of the many policy flip flops that he presided over (remember the SI 55 and SI 33 debacle?). Even more devastating is the fact that the external debt stock increased four times during his tenure (see this graph). The fiscal deficit (a measure of revenue short-fall) went from 1% of GDP in 2011 to 7% of GDP in 2015 (see this graph). It's this latter mismanagement of the country's finances that's necessitated a re-engagement with the IMF for assistance.

In a piece for Quartz Africa last year, I calculated the country's revenue short-fall at about $1.9 billion. Bloomberg, in a piece published just before last August's elections and quoting the president's spokesperson, reported that the government will be seeking a loan of about $1.2 billion from the Fund. But this money won't come for free. It will require drastic expenditure cuts to reduce the fiscal deficit.

And this is where Mutati's appointment is incredibly important. He will have to negotiate, on behalf of the country, which parts of expenditure are to be trimmed down. Going by the IMF's history and its ideological underpinnings, the Fund will likely call for a drastic reduction in the types of expenditure that are incredibly important for the poor (subsidies to agriculture, education, etc...).

Following Mutati's appointment, many have questioned his ability to run the Ministry of Finance given that he's not an economist. I am much less worried about his training than I am about his ideological inclinations because this, more than anything else, will determine what Zambia looks like post-the IMF engagement. And here there's cause to worry.

Recall that Mr. Mutati has, for the most part of his political career, been a card carrying member of the Movement for Multiparty Democracy (MMD). And the MMD in the 1990s largely presided over the implementation of Structural Adjustment Policies (SAPs) in Zambia betraying the party's free-market inclinations. Frederick Chiluba, Zambia's first president under the MMD, was famous for quoting Adam Smith, he of the invisible hand mysticism. It is this party, with its ideological inclinations, that Felix Mutati joined early in the last decade culminating in his appointment as Commerce Minister in 2006. His job as Commerce Minister was largely to create an "enabling environment" for private sector (read: foreign capital) to flourish. And we shouldn't forget that Mr. Mutati currently believes he's the rightful head of the MMD.

Granted, MMD's policies moved slightly to left during Mwanawasa's tenure. For example, the incredibly successful Farmer Input Support Programme (FISP) was started under Mwanawasa's term. Discussions of a windfall tax on the copper mines were also started during this time. But the party still largely remained market-oriented in inclination. It is unimaginable, for example, that an Industrial Development Corporation would have been established under an MMD government.  

So given all this, I am less hopeful about the kind of role Mr. Mutati will play when those negotiations start. Will he, as a matter of principle, object to cuts on agricultural subsidies? Or will he agree to the cuts under the pretext that it's the practical thing to do? I can imagine that our "friends" in Washington are excited at the prospect of having to work with Mr. Mutati. (On issues of principle, recall that not too long ago Mr. Mutati endorsed Hakainde Hichilema's candidacy only to surprisingly change gear a few months later and endorsed Edgar Lungu).

I wish President Lungu had appointed a stubborn socialist as Minister of Finance given what's at stake here (think here of someone like the UPP's Dr Saviour Chishimba, abstracting for the moment from the constitutional issues around whether unsuccessful presidential candidates can serve in government). Yes, we need to cut back on some expenditure types. But a stubborn socialist would have given the IMF such a tough time that the only practical thing to do would have been to meet halfway.